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Polycentric banking and macroeconomic stability

Published online by Cambridge University Press:  03 March 2017

Alexander William Salter  and
Vlad Tarko
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Abstract

We contribute to the post-crisis literature on macroeconomic stability by arguing that polycentric banking systems can better achieve stability than monocentric systems. Building on the theories of E. Ostrom, we engage the literature on free banking systems to show that these systems met the requirements of polycentric governance systems, and that the unintentional result of the underlying governance institutions was macroeconomic stability. In contrast, modern central banking, because it is monocentric, lacks important features regarding knowledge aggregation and incentive compatibility conducive to generating macroeconomic stability. We conclude by discussing various legal barriers that stand in the way of a transition from monetary monocentrism to monetary polycentrism.

Type
Research Article
Information
Business and Politics , Volume 19 , Special Issue 2: Property Rights, Financial Risk, and the Politics of a Networked Global Financial System , June 2017 , pp. 365 - 395
Copyright
Copyright © V.K. Aggarwal 2017 and published under exclusive license to Cambridge University Press 

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